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Is there a case to retain legal referral fees in car insurance?14 Aug 2011by Pat Hoyle The Government, having recently declared itself "sympathetic" to a referral fee ban in car insurance, is currently investigating the proposal with a view, it would appear, to banning them. Jack Straw's campaign, in which he referred to them as "a racket", appears to have been pivotal to their change of heart as, while they had embraced the other major recommendations of the Jackson Report, they had resisted his recommendation to ban them. Neither the Legal Services Board (that regulates lawyers) when it looked at referral fees, nor the Transport Select Committee  when it investigated the high cost of car
insurance, called for a referral fee ban although both accepted a need
for greater transparency. In the light of Jack Straw's intervention, the Transport Committee will be re-opening their enquiry to include evidence from Mr Straw and the likely outcome will be a hardening of their position on referral fees and the probable recommendation of a ban. The Law Society has publically criticised the Legal Services Board for not calling for a referral fee ban while some injury lawyers themselves have also called for a ban. The insurance industry is generally in favour of a ban - Axa has already stopped accepting referral fees - while the Association of British Insurers (ABI) has lobbied the Government to accept Jackson's recommendation to ban them. The argument against referral fees, in a nutshell, is that they encourage referrals based not on the legal firm's merit, suitability for the client or value for money but instead based on who pays the biggest referral fee. They therefore inflate costs and potentially act against the provision of the most suitable legal representation at the most economic cost. The car insurance consumer picks up the extra cost via ever-increasing premiums. These may be powerful arguments but they presuppose that all lawyers are trying to grab as many claimants as possible for themselves by paying ever-larger referral fees compared to their competitors. However, these referral fees are not recoverable if they lose a no win, no fee case, so there is no advantage to making them excessive. Indeed, when the Legal Services Board (LSB) looked at this, they found that there were economies of scale associated with referral fees. This is because they can be used collectively to finance a single claims management firm's advertising, so attracting new claimants, that are then passed onto the numerous referral-fee paying lawyers. The LSB found that this process did not inflate legal costs (compared to the cost of lawyers doing their own advertising) and, by raising awareness about how to get compensation for injury claims, access to justice was improved. Furthermore, injury lawyers have to assess each new case on its merits. Cases pursued on a no win, no fee basis must have a reasonable likelihood of success. When one major claims management firm, Accident Advice Helpline, analysed 69,000 cases that they referred to solicitors, they found that under a third were taken by the first firm to which they were referred, according to the Access to Justice Action Group (AJAG). In fact, referral fees paid by lawyers are similar to commissions paid by car insurance companies. Both are paid to intermediaries such as a claims management firm (a legal referral) or a price comparison site (an insurance referral). In both cases the amount paid covers the cost expended by the intermediary to send business to the service provider, whether that provider is a law firm or an insurance company. As an alternative to a referral fee, the law firm can spend more on its own advertising, reducing the need to take referrals from an intermediary. Similarly, a car insurance provider is less dependent on price comparison site-driven business if it does more of its own advertising. Just as a price comparison site helps consumers to find an insurance product, so a claims management company helps potential claimants to find a lawyer. Each intermediary is a part of the market, helping people to access insurance or justice. The referal fee does not add to overall costs as it reduces advertising costs for the primary service provider. It can be seen as a market lubricant that is cost neutral as it costs money to attract new business in any market, by whatever means. The lobby against the banning of referral fees argues that it is disingenuous of car insurance providers to argue against a referral fee ban when it fulfills the same role as their payment of commissions or advertising costs. They have a point. |
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